HomeBlog Bain’s ambitions for the Low Pay Commission would fundamentally change its remit

Bain’s ambitions for the Low Pay Commission would fundamentally change its remit

Ryan Bourne

21 February 2014

Public choice theorist William Niskanen had much to say on the growth of government bureaucracies and bodies. Whilst recognising that they ultimately depend on politicians for their budgets, they would (he argued) seek to maximise their own benefit within a budget settlement. Thus, they would advise on the need for new functions, and ultimately money to be able to deal with them.

Today, one such body, the Low Pay Commission (LPC), has been given a helping hand in its case for expansion following a report by the Resolution Foundation. The LPC is currently responsible for advising the government on the level of the UK’s national minimum wage (NMW). But the Resolution Foundation authors have much loftier ambitions for the Commission, including a much broader remit ‘to monitor overall low pay, assess its causes, consequences or costs, or advise policy on how to tackle it’. Admittedly this is one of a number of options set out by the Foundation, but each option is designed to ‘strengthen’ the NMW – which in reality means increase it and/or widen the scope of the LPC’s activities.

The classical-liberal case against minimum wage laws on the grounds of free bargaining and agreement, as made by Epstein, is now largely absent from contemporary debate. Instead, discussion is now really about the economic consequences of the NMW and proposed increases in its level. The consensus view is that the LPC has set the NMW such that aggregate employment has not been particularly adversely affected, though certain groups inevitably see reduced opportunities (particularly the young and very unskilled) as one might expect. But economists also agree that the level still matters for the extent of dis-employment (or more accurately, labour hours effects). That’s why in the past couple of weeks we’ve seen the Treasury estimate that unemployment would increase by 14,000 if the NMW was increased to £7 by 2015/16 and the Congressional Budget Office in the US estimate that President Obama’s proposed federal minimum wage increase would increase unemployment by 500,000.

When the NMW was introduced, the justification was to eradicate extremely low pay. By definition, this cannot legally occur any more (though anecdotally this still happens in the black-market economy). But the Resolution Foundation now thinks that the LPC’s remit should be expanded, because lots of people earn around the minimum wage. The LPC needs more powers, they suggest, because for many the floor looks more like a ceiling. Many employers face ‘little pressure’ to go beyond their legal obligation. The idea that a low wage in a particular sector might be indicative of being able to use unskilled labour in that sector easily or else substitute it easily for more productive labour or capital is ignored, as is the role played by tax credits.

Rather than placing large emphasis on economic outcomes such as employment as within the current framework, the Foundation instead says that low pay (defined as two-thirds of median income) could be the variable that the LPC focuses on. This relative definition of ‘low’, in essence, would institutionalise the LPC as a body to reduce inequality rather than to provide a low acceptable floor. It is an inherently ideological commitment to equality imposed through asking employers to internalise the costs of this social aim.

This starting point though leads to three broad options for action, outlined by Sir George Bain in the FT:

- for the government to set an explicit ambition to reduce the share of workers who are low-paid and to broaden the LPC’s remit so it could monitor progress and advise on policies to achieve it;

- to set a medium-term target for the level of the minimum wage, giving business time to adapt to a higher rate;

- having the LPC recommend a higher wage floor, probably non-mandatory, for sectors that can afford to pay more such as finance and parts of manufacturing, or a higher rate for certain regions, starting with London

The first two would represent a significant change in the institution’s remit, as outlined, but most importantly would reduce the focus away from the economic impacts, particularly on employment and the ability of businesses to pay. Their focus suggests that the NMW is an effective way of reducing poverty (which is not the same as low pay), though the IFS helpfully reminds us that 44 per cent of all UK ‘low-paid’ workers are in families in the top half of the income distribution; 12 per cent are in the top fifth of the distribution.

Whilst regionalisation of the NMW would be an improvement on the current NMW, it’s likely that what the Resolution Foundation have in mind is actually increasing it in certain areas – bringing all the same debates about levels which dominate the literature. Meanwhile, applying sectorial ‘recommended rates’ for different industries would either be trivial or wrong. Trivial, if there were no sanctions whatsoever and sectors which would be heavily affected simply ignored it. Or wrong, if the LPC was given powers of enforcement, with a large bureaucracy attempting to define sectors which change dynamically. Would a cleaning service contracted to a bank face the sectorial minimum wage of domestic services or finance? All of a sudden it looks like a throwback to 1970s incomes policies.

Many supporters of a free-market oppose the NMW on principle. Despite some of the inevitable negative consequences of the NMW existence, the LPC has though at least taken the threat to employment seriously in setting the level. The options outlined in the Resolution Foundation’s paper would, however, water down this commitment, focusing instead on inequality and the LPC having more power over a much larger range of wage setting. Divorcing much more wage setting from any notion of productivity and instead handing responsibility over to central planners is akin to the same mistake that’s been made through history with rent controls. Beware of lofty sounding intentions. And mission creep.

The LPC and IEA both ignore the full role of the welfare/tax system and the interface between the two and NMW.
Despite Ian Duncan Smith's reforms, the system will remain overcomplicated and fail to solve the problem.
As the IEA article implies, NMW has become the norm in many industries, even where it could be below the market rate. Businesses are factoring in welfare benefits when setting wage . In affect, the welfare system is subsidising wages below the market rate.
A better (or added) target should be to increase the MNW to a level that reduces or, even eliminates the number of people who are drawn into the in-work welfare system by paying all of the income (NMW+ Benefits) through the employer in the normal way. This new NMW should also be tax free.
To compensate the employers - full or in part - employer NI should be reduced or abolished.
Millions would then be independent of the welfare system which could then concentrate on those out of work.
A part of this, we need to remove universal benefits. No one paying tax should receive benefits and no one on benefit or NMW should pay tax.
Of course, the numbers matter and I don't have them but the end product would be a much simpler welfare/tax/NMW system.
Other issues dealt with in this article about differences in industries and regions also would have to be considered but would probably be less important in this system.
Once up and running, however, this system would not require the bureaucracy feared in the article.
Again, there would be those priced out of the market because of a lack of experience, education or training. These would have to receive the training/help required to make them more employable in to-days high-tech job market.
John Bell
Conservative Parliamentary Candidate for Wirral South

Submitted by Whig on Sat, 22/02/2014 - 08:18.

John Bell - you are right that the benefits system is a problem here, but it is so complex that the author can hardly be expected to tackle it too. unfortunately, increasing the NMW - even in the manner you propose - would cause far greater damage to the unemployed than you recognise. The victims of the NMW are these groups, who have little voice, and who are thus forced into welfare dependency. State sponsored training - always offered as a salve - does not work. These people are unskilled because state education has already failed them - there are a million young unemployed, a number which is entirely unrelated to the economic cycle. The best form of training is to work, even in relatively low-paid roles which cost the tqxpayer nothing. These people are probably being condemned to a life of unemployment by policies such as the NMW and the EU temporary workers directive. I'd like to see a Conservative candidate who lobbied against the NMW not for its expansion! Far better to tackle low pay by raising tax thresholds (abolishing employers 'NI' is a good start) and cutting tax eg on fuel which is an employment tax, in effect, as well, and reducing poverty by liberalising the housing and childcare markets etc.

Submitted by D.R. Myddelton on Sat, 22/02/2014 - 15:45.

I particularly enjoyed John Bell's comment: 'Of course the numbers matter and I don't have them.' He'll make a good MP!

DR: My point was I was putting forward broad principles about an article I had just read that would require further examination after looking at the detailed numbers which would require the services of the Treasury and welfare statistical facilities which are not available to me.
It is perfectly legitimate to put forward an hypothesis and then see how it stands up to detailed, statistical examination.
Of course, there are those who can only criticise without making any real contribution to the debate even in general terms.

Submitted by D.R. Myddelton on Sat, 22/02/2014 - 22:54.

John Bell: Anybody can 'reform' the tax system if they don't have to worry about the numbers. My own suggestions are contained in my book 'The Power to Destroy: a study of the British tax system' (1969, 2nd ed. 1994). I hope that represents a positive contribution to the debate.

Submitted by philip on Sun, 23/02/2014 - 10:23.

@John Bell - I think you will find that DR makes a lot of useful contributions to this blog in both specific and general terms - he was just having a joke (which we allow too - even at the expense of prospective MPs!). Should you become an MP, I think you will find some of his very specific work on (for example) government infrastructure projects and some of his more general work on (for example) standards and regulation in accounting useful in holding the government of the day to account. I must admit that I read your comment several times and did not really understand it. Of course, the benefits system with its huge withdrawal rates (after the universal credit reform it will still be over 70% for most families with three children) does create a problem. However, i think one has to look at that specific problem rather than create a minimum wage because of the benefits system and then make the minimum wage even more complex because of an already complex benefit system. Again, you might like to look at some of the IEA's specific and general work on how to resolve the problems in the benefit system. All single people working 40 hours on the full minimum wage will receive negligible benefits. I think that should raise an issue for you - those who get benefits receive them either to support their family (i.e. they are entitled to more benefits because they have children) or because they are not working 40 hours a week. Whether we have the right benefits system or not, I don't think these two functions can become the function of the minimum wage. In addition, as Ryan notes, fewer people than one might expect who are in receipt of the minimum wage are in households receiving significant amounts of benefit.

Post new comment

Your name: *

E-mail: *

The content of this field is kept private and will not be shown publicly.